Business Law

Business

Quiz 27 :

Liability, Defenses, and Discharge

Quiz 27 :

Liability, Defenses, and Discharge

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QUESTION WITH SAMPLE ANSWER: Customer Negligence. Gary goes grocery shopping and carelessly leaves his checkbook in his shopping cart. His checkbook, with two blank checks remaining, is stolen by Dolores. On May 5, Dolores forges Gary's name on a check for $10 and cashes the check at Gary's bank, Citizens Bank of Middletown. Gary has not reported the loss of his blank checks to his bank. On June 1, Gary receives his monthly bank statement and copies of canceled checks from Citizens Bank, including the forged check, but he does not examine the canceled checks. On June 20, Dolores forges Gary's last check. This check is for $1,000 and is cashed at Eastern City Bank, a bank with which Dolores has previously done business. Eastern City Bank puts the check through the collection process, and Citizens Bank honors it. On July 1, on receipt of his bank statement and canceled checks covering June transactions, Gary discovers both forgeries and immediately notifies Citizens Bank. Dolores cannot be found. Gary claims that Citizens Bank must recredit his account for both checks, as his signature was forged. Discuss fully Gary's claim.
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Customer Negligence:
In the case of Gary v. Citizens Bank of Middletown, a court would find in favor of the bank.
Under the UCC 3-401 and 4-406 , Gary substantially contributed through his negligence to the theft and subsequent forgeries. Gary also had a duty to exercise reasonable care and promptness in examining the statement to discover any forgeries and report them to the drawee bank.
Gary did not meet either and subsequently lost his standing to claim negligence for payment of forged checks. However, the bank could be liable to the extent that its negligence substantially contributes to the loss on the first forged check.
Failure to discover and report a forged check releases the drawee bank from liability for all additional forged checks in the series written after the thirty-day period. Therefore, Gary's failure to discover the May forged check by June 30 relieves the bank from liability for the June 20 check of $1,000.

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What do you think would result if the law was changed to allow personal defenses to be successfully raised against HDCs? Who would lose, and who would gain? How would such a change in the law affect the flow of commerce in this country?
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Change:
If the law was changed to allow personal defenses to be successfully raised against holders in due course the person(s) in the worst position to understand and defend against new issues raised against their lawful possession of an instrument.
It would be less fair for a holder in due course to be denied the opportunity to collect payment. The burden falls on the party that was in the best position to prevent the loss. In all cases that is the most fair.
The change would negatively impact the legal process as well as commerce because there would be no guarantee that a holder in due course had actual legal rights to an instrument. Every possession would be called into question and commerce would slow to a crawl and eventually stop.

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RPM Pizza, Inc., issued a check for $96,000 to Systems Marketing for an advertising campaign. A few days later, RPM decided not to go through with the deal and placed a written stop-payment order on the check. RPM and Systems had no further contact for many months. Three weeks after the stop payment order expired, however, Toby Rierson, an employee at Systems, cashed the check. Bank One Cambridge, RPM's bank, paid the check with funds from RPM's account. Because of the amount of the check, and because the check was more than six months old (stale), the signature on the check should have been specially verified according to standard banking procedures and Bank One's own policies, but it was not. RPM fi led a suit in a federal district court against Bank One to recover the amount of the check. Using the information presented in the chapter, answer the following questions. How long is a written stop-payment order effective? What else could RPM have done to prevent this check from being cashed? DEBATE THIS: To reduce fraud, checks that utilize mechanical or electronic signature systems should not be honored.
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UCC 4-403(b)
According to this section; a customer can stop the payment of its check by making a written order. The order is effective for following time periods:
1) When the order is in written form; it is effective for six months.
2) When the order is in oral form; it is effective for 14 days. Within this time period, the order should be confirmed in written.
R should have taken following steps to prevent the cashing of the check:
1) It should have been renewed the stop payment order for next six months.
2) The bank should have considered the check as the stale check.
3) R should have asked the S Company for not cashing the check. Since, R did not contact the S Company after issuing check; the company did not know about the stop order.

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RPM Pizza, Inc., issued a check for $96,000 to Systems Marketing for an advertising campaign. A few days later, RPM decided not to go through with the deal and placed a written stop-payment order on the check. RPM and Systems had no further contact for many months. Three weeks after the stop payment order expired, however, Toby Rierson, an employee at Systems, cashed the check. Bank One Cambridge, RPM's bank, paid the check with funds from RPM's account. Because of the amount of the check, and because the check was more than six months old (stale), the signature on the check should have been specially verified according to standard banking procedures and Bank One's own policies, but it was not. RPM fi led a suit in a federal district court against Bank One to recover the amount of the check. Using the information presented in the chapter, answer the following questions. Assume that Rierson's indorsement on the check was a forgery. Would a court be likely to hold the bank liable for the amount of the check because it failed to verify the signature on the check? Why or why not? DEBATE THIS: To reduce fraud, checks that utilize mechanical or electronic signature systems should not be honored.
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A QUESTION OF ETHICS: Forged Drawer's Signature. From the 1960s, James Johnson served as Bradley Union's personal caretaker and assistant, and was authorized by Union to handle his banking transactions. Louise Johnson, James's wife, wrote checks on Union's checking account to pay his bills, normally signing the checks "Brad Union." Branch Banking Trust Co. (BB T) managed Union's account. In December 2000, on the basis of Union's deteriorating mental and physical condition, a North Carolina state court declared him incompetent. Douglas Maxwell was appointed as Union's guardian. Maxwell "froze" Union's checking account and asked BB T for copies of the canceled checks, which were provided by July 2001. Maxwell believed that Union's signature on the checks had been forged. In August 2002, Maxwell contacted BB T, which refused to recredit Union's account. Maxwell filed a suit on Union's behalf in a North Carolina state court against BB T. [ "Union v. Branch Banking Trust Co., 176 N.C.App. 711, 627 S.E.2d 276 (2006)] (a) Before Maxwell's appointment, BB T sent monthly statements and canceled checks to Union, and Johnson reviewed them, but no unauthorized signatures were ever reported. On whom can liability be imposed in the case of a forged drawer's signature on a check? What are the limits set by Section 4-406(f) of the Uniform Commercial Code? Should Johnson's position, Union's incompetence, or Maxwell's appointment affect the application of these principles? Explain. (b) Why was this suit brought against BB T? Is BB T liable? If not, who is? Why? Regardless of any violations of the law, did anyone act unethically in this case? If so, who and why?
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Forged Drawers' Signatures Debbie Brooks and Martha Tingstrom lived together. Tingstrom handled their finances. For five years, Brooks did not look at any statements concerning her accounts. When she finally reviewed the statements, she discovered that Tingstrom had taken $85,500 from her through her checking account with Transamerica Financial Advisors. Tingstrom had forged Brooks's name on six checks paid between one and two years earlier. Another year passed before Brooks filed a suit in a Louisiana state court against Transamerica. Brooks alleged that the bank had paid the unauthorized checks without obtaining proper identification and approval from her, the account holder. The defendant contended that Brooks was too late. Who is most likely to suffer the loss for the checks paid with Brooks's forged signature? Why? [Brooks v. Transamerica Financial Advisors, __ So.3d __ (La.App. 2 Cir. 2011)]
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Bank's Duty to Honor Checks Sheila Bartell was arrested on various charges related to burglary, the possession for sale of methamphetamine, and other crimes. She pleaded guilty in a California state court to some charges in exchange for the dismissal of others and an agreement to reimburse the victims. The victims included "Rita W.," who reported that her checkbook had been stolen and her signature forged on three checks totaling $590. Wells Fargo Bank had "covered" the checks and credited her account, however, so the court ordered Bartell to pay the bank. Bartell appealed, arguing that the bank was not entitled to restitution. What principles apply when a person forges a drawer's signature on a check? Is the bank entitled to recover from the defendant? Explain. [ People v. Bartell, 170 Cal.App.4th 1258, 88 Cal.Rptr.3d 844 (3 Dist. 2009)]
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RPM Pizza, Inc., issued a check for $96,000 to Systems Marketing for an advertising campaign. A few days later, RPM decided not to go through with the deal and placed a written stop-payment order on the check. RPM and Systems had no further contact for many months. Three weeks after the stop payment order expired, however, Toby Rierson, an employee at Systems, cashed the check. Bank One Cambridge, RPM's bank, paid the check with funds from RPM's account. Because of the amount of the check, and because the check was more than six months old (stale), the signature on the check should have been specially verified according to standard banking procedures and Bank One's own policies, but it was not. RPM fi led a suit in a federal district court against Bank One to recover the amount of the check. Using the information presented in the chapter, answer the following questions. What would happen if it turned out that RPM did not have a legitimate reason for stopping payment on the check? DEBATE THIS: To reduce fraud, checks that utilize mechanical or electronic signature systems should not be honored.
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Bank's Duty to Honor Checks On January 5, Brian drafts a check for $3,000 drawn on Southern Marine Bank and payable to his assistant, Shanta. Brian puts last year's date on the check by mistake. On January 7, before Shanta has had a chance to go to the bank, Brian is killed in an automobile accident. Southern Marine Bank is aware of Brian's death. On January 10, Shanta presents the check to the bank, and the bank honors the check by payment to Shanta. Later, Brian's widow, Joyce, claims that because the bank knew of Brian's death and also because the check was by date more than one year old the bank acted wrongfully when it paid Shanta. Joyce, as executor of Brian's estate and sole heir by his will, demands that Southern Marine Bank recredit Brian's estate for the check paid to Shanta. Discuss fully Southern Marine's liability in light of Joyce's demand.
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Electronic Fund Transfers Yannuzzi has a checking account at Texas Bank. She frequently uses her debit card to obtain cash from the bank's automated teller machines. She always withdraws $50 when she makes a withdrawal, but she never withdraws more than $50 in any one day. When she received the April statement on her account, she noticed that on April 13 two withdrawals for $50 each had been made from the account. Believing this to be a mistake, she went to her bank on May 10 to inform it of the error. A bank officer told her that the bank would investigate and advise her as to the result. On May 26, the bank officer called her and said that bank personnel were having trouble locating the error but would continue to try to find it. On June 20, the bank sent her a full written report telling her that no error had been made. Yannuzzi, unhappy with the bank's explanation, filed a suit against the bank, alleging that it had violated the Electronic Fund Transfer Act. What was the outcome of the suit? Would it matter if the bank could show that on the day in question it deducted $50 from Yannuzzi's account to cover a check that cleared the bank on that day-a check that Yannuzzi had written to a local department store?
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Because the UCC offers special protection to HDCs, innocent makers of notes or drawers of checks in fraudulent transactions often have no legal recourse. From an ethical standpoint, how could you justify to the "losers" in such situations the provisions of the UCC that fail to protect them? Can you think of a way in which such problems could be handled more fairly or ethically than they are under the UCC?
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Forged Signatures Roy Supply, Inc., and R. M. R Drywall, Inc., had checking accounts at Wells Fargo Bank. Both accounts required all checks to carry two signatures-that of Edward Roy and that of Twila June Moore, both of whom were executive officers of both companies. Between January 2009 and March 2010, the bank honored hundreds of checks on which Roy's signature was forged by Moore. On January 31, 2011, Roy and the two corporations notified the bank of the forgeries and then filed a suit in a California state court against the bank, alleging negligence. Who is liable for the amounts of the forged checks? Why?
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Do you think that the UCC's provisions have struck an appropriate balance between the interests of banks and those of bank customers? Why or why not?
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Bank's Duty of Care Arnett Gertrude, a widow with no children, lived with her sister and her nephew Jack Scriber. When Gertrude was diagnosed with cancer, she added Scriber as an authorized signatory to her checking account at Salyersville National Bank and gave him power of attorney. Shortly before Gertrude died, Scriber wrote checks on the account to withdraw nearly all of the $600,000 in the account and transferred the funds into his own account. After Gertrude's death, Bobbie Caudill, the administrator of the estate, discovered the withdrawals. Caudill sued the bank for aiding Scriber in the conversion of Gertrude's funds. The bank's defense was that Scriber had power of attorney over Gertrude's finances and had the power to write checks on the account, so the bank had to honor the checks that Scriber had written. The estate argued that the bank had breached its duty to Gertrude to guard against such obvious misappropriation. The trial court held for the bank. Did the bank breach its duty to Gertrude? Why or why not? [ Caudill v. Salyersville National Bank, ___ S.W.3d __ (Ky.App. 2010)]
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Forged Indorsements In 1994, Brian and Penny Grieme bought a house in Mandan, North Dakota. They borrowed for the purchase through a loan program financed by the North Dakota Housing Finance Agency (NDHFA). The Griemes obtained insurance for the house from Center Mutual Insurance Co. When a hailstorm damaged the house in 2001, Center Mutual determined that the loss was $4,378 and issued a check for that amount, drawn on Bremer Bank, N.A. The check's payees included Brian Grieme and the NDHFA. Grieme presented the check for payment to Wells Fargo Bank of Tempe, Arizona. The back of the check bore his signature and in handprinted block letters the words "ND Housing Finance. The check was processed for collection and paid, and the canceled check was returned to Center Mutual. By the time the insurer learned that NDHFA's indorsement had been forged, the Griemes had canceled their policy, defaulted on their loan, and filed for bankruptcy. The NDLIFA filed a suit in a North Dakota state court against Center Mutual for the amount of the check. Who is most likely to suffer the loss in this case? Why? [ State ex rel. North Dakota Housing Finance Agency v. Center Mutual Insurance Co., 720 N.W.2d 425 (N.Dak. 2006)]
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RPM Pizza, Inc., issued a check for $96,000 to Systems Marketing for an advertising campaign. A few days later, RPM decided not to go through with the deal and placed a written stop-payment order on the check. RPM and Systems had no further contact for many months. Three weeks after the stop payment order expired, however, Toby Rierson, an employee at Systems, cashed the check. Bank One Cambridge, RPM's bank, paid the check with funds from RPM's account. Because of the amount of the check, and because the check was more than six months old (stale), the signature on the check should have been specially verified according to standard banking procedures and Bank One's own policies, but it was not. RPM fi led a suit in a federal district court against Bank One to recover the amount of the check. Using the information presented in the chapter, answer the following questions. What are a bank's obligations with respect to stale checks? Should Bank One have contacted RPM before paying the check? Why or why not? DEBATE THIS: To reduce fraud, checks that utilize mechanical or electronic signature systems should not be honored.
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